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BYFC > SEC Filings for BYFC > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for BROADWAY FINANCIAL CORP \DE\ | Request a Trial to NEW EDGAR Online Pro

Form 10-K for BROADWAY FINANCIAL CORP \DE\


1-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and other factors that have affected our reported results of operations and financial condition or may affect our future results or financial condition. Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

Overview

During 2011 and continuing through 2012, the U.S. economy has shown signs of a slow recovery from the recession which began in 2008. The national unemployment rate, while still at a high level, declined to 7.8% for December 2012, compared to 8.5% for December 2011. In Southern California where we operate, the unemployment rate remains higher at 9.8% for December 2012. In addition to the challenging economic environment, the regulation and oversight of our business changed significantly during 2011. As described in more detail in Item 1 "Regulation," certain aspects of the Dodd-Frank Act have had and will continue to have an impact on us, including the combination on July 21, 2011 of our former primary banking regulator, the OTS, with the OCC, and transfer of the OTS's responsibilities as regulator of savings and loan holding companies to the FRB, the imposition of consolidated holding company capital requirements and changes to deposit insurance assessments.

Total assets decreased during 2012 primarily due to a decrease in our loan portfolio, as loan repayments, foreclosures and charge-offs exceeded loan originations during the year. The decrease in our loan portfolio, including loans held for sale, consisted of a $25.4 million decrease in our five or more units residential real estate loan portfolio, a $13.5 million decrease in our commercial real estate loan portfolio, a $14.1 million decrease in our church loan portfolio, a $11.0 million decrease in our one-to-four family residential real estate loan portfolio, a $3.1 million decrease in our construction loan portfolio, a $3.1 million decrease in our commercial loan portfolio, and a $825 thousand decrease in our consumer loan portfolio.

Total deposits decreased during 2012, as we continued to allow maturing certificates of deposit and brokered deposits, including deposits obtained through the CDARS reciprocal deposit referral system, to run off as total assets declined. Since the end of 2011, FHLB borrowings decreased by $3.5 million while subordinated debentures and other borrowings remained unchanged.

Our net earnings for the year ended December 31, 2012 were $588 thousand, compared to net loss of $14.3 million for the same period a year ago, representing an improvement of $14.8 million. The increase from a net loss to net earnings was primarily due to lower provisions for loan losses, a $2.5 million gain on the sale of our headquarters building, lower provisions for losses on REO and loans held for sale and lower income tax provision expense for the year 2012.

Going Concern and Regulatory Matters

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a tax sharing liability to its consolidated subsidiary that exceeds its available cash, the Company is in default under the terms of a $5 million line of credit with another financial institution lender in which the stock of its subsidiary bank, Broadway Federal Bank (the "Bank") is held as collateral for the line of credit and the Company and the Bank are both under formal regulatory agreements. Furthermore, the Company and the Bank are not in compliance with these agreements but management believes that the recapitalization plan that the Company is pursing will allow it to address many of the areas of non-compliance. Failure to comply with these agreements exposes the Company and the Bank to further regulatory sanctions. These matters raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors, one of which is regulatory action, including acceptance of its capital plan. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Please also see Item 1, Business, Business Overview; Recent Developments.


Table of Contents

Analysis of Net Interest Income

Net interest income is the difference between income on interest-earning assets and the expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. The yields set forth below include the effect of deferred loan fees, and discounts and premiums that are amortized or accreted to interest income or expense. We do not accrue interest on loans on non-accrual status; however, the balance of these loans is included in the total average balance, which has the effect of reducing average loan yields.

                                                             For the year ended December 31,
                                                      2012                                      2011
                                                                  Average                                   Average
                                       Average                     Yield/        Average                     Yield/
(Dollars in Thousands)                 Balance      Interest        Cost         Balance      Interest        Cost
Assets
Interest-earning assets:
Interest-earning deposits             $   6,559     $      22         0.34 %    $   6,271     $      14         0.22 %
Federal Funds sold and other
short-term investments                   36,723            38         0.10 %       17,881            14         0.08 %
Investment securities                       481            24         4.99 %        1,000            50         5.00 %
Residential mortgage-backed
securities                               14,946           467         3.12 %       19,388           650         3.35 %
Loans receivable (1)(2)                 325,029        19,279         5.93 %      397,402        24,376         6.13 %
FHLB stock                                3,939            61         1.55 %        4,089            11         0.27 %

Total interest-earning assets           387,677     $  19,891         5.13 %      446,031     $  25,115         5.63 %

Non-interest-earning assets               6,738                                     6,629

Total assets                          $ 394,415                                 $ 452,660

Liabilities and Shareholders'
Equity
Interest-bearing liabilities:
Money market deposits                 $  18,980     $      82         0.43 %    $  24,063     $      98         0.41 %
Passbook deposits                        36,530           118         0.32 %       38,176           129         0.34 %
NOW and other demand deposits            37,814            27         0.07 %       42,210            40         0.09 %
Certificate accounts                    181,849         3,019         1.66 %      215,611         4,226         1.96 %

Total deposits                          275,173         3,246         1.18 %      320,060         4,493         1.40 %
FHLB advances                            82,694         2,437         2.95 %       86,967         2,699         3.10 %
Junior subordinated debentures and
other borrowings                         11,000           743         6.75 %       11,000           859         7.81 %

Total interest-bearing liabilities      368,867     $   6,426         1.74 %      418,027     $   8,051         1.93 %

Non-interest-bearing liabilities          6,776                                     5,519
Shareholders' Equity                     18,772                                    29,114

Total liabilities and shareholders'
equity                                $ 394,415                                 $ 452,660

Net interest rate spread (3)                        $  13,465         3.39 %                  $  17,064         3.70 %

Net interest rate margin (4)                                          3.47 %                                    3.83 %
Ratio of interest-earning assets to interest-bearing
liabilities                                                         105.10 %                                  106.70 %
Return on average assets                                              0.15 %                                   (3.15 %)
Return on average equity                                              3.13 %                                  (48.96 %)
Average equity to average assets ratio                                4.76 %                                    6.43 %
Dividend payout ratio (5)                                               -                                         -

(1) Amount is net of deferred loan fees, loan discounts, and loans in process, and includes loans held for sale.

(2) Amount excludes interest on non-performing loans.

(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4) Net interest rate margin represents net interest income as a percentage of average interest-earning assets.

(5) Percentage is calculated based on dividends on common stocks divided by net earnings (loss) less dividends and accretion on preferred stocks.


Table of Contents

Changes in our net interest income are a function of changes in both rates and volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth information regarding changes in our interest income and expense for the years indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the total change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

                                             Year ended December 31, 2012                Year ended December 31, 2011
                                                     Compared to                                 Compared to
                                             Year ended December 31, 2011                Year ended December 31, 2010
                                              Increase (Decrease) in Net                  Increase (Decrease) in Net
                                                   Interest Income                             Interest Income
                                          Due to         Due to                       Due to         Due to
                                          Volume          Rate         Total          Volume          Rate         Total
                                                                          (In thousands)
Interest-earning assets:
Interest-earning deposits               $        1       $     7      $      8      $        5       $    (1 )    $      4
Federal funds sold and other short
term investments                                18             6            24              (3 )          (6 )          (9 )
Investment securities, net                     (26 )          -            (26 )            -             -             -
Mortgage backed securities, net               (141 )         (42 )        (183 )          (216 )         (48 )        (264 )
Loans receivable, net                       (4,147 )        (950 )      (5,097 )        (4,024 )        (647 )      (4,671 )
FHLB stock                                      -             50            50              (1 )          (7 )          (8 )

Total interest-earning assets               (4,295 )        (929 )      (5,224 )        (4,239 )        (709 )      (4,948 )

Interest-bearing liabilities:
Money market deposits                          (22 )           6           (16 )           (22 )         (62 )         (84 )
Passbook deposits                               (5 )          (6 )         (11 )             3           (37 )         (34 )
NOW and other demand deposits                   (4 )          (9 )         (13 )           (10 )         (54 )         (64 )
Certificate accounts                          (611 )        (596 )      (1,207 )        (1,158 )         (77 )      (1,235 )
FHLB advances                                 (129 )        (133 )        (262 )           (31 )        (200 )        (231 )
Junior subordinated debentures                  -             12            12              -             (2 )          (2 )
Other borrowings                                -           (128 )        (128 )            54           374           428

Total interest-bearing liabilities            (771 )        (854 )      (1,625 )        (1,164 )         (58 )      (1,222 )

Change in net interest income           $   (3,524 )     $   (75 )    $ (3,599 )    $   (3,075 )     $  (651 )    $ (3,726 )

Comparison of Operating Results for the Years Ended December 31, 2012 and 2011

General

Our most significant source of income is net interest income, which is the difference between our interest income and our interest expense. Generally, interest income is generated from our loans and investments (interest-earning assets) and interest expense is generated from deposits and borrowings (interest-bearing liabilities). Our results of operations are also affected by our provision for losses, non-interest income generated from service charges and fees on loan and deposit accounts, gain or loss on the sale of loans and securities, non-interest expenses and income taxes.

Net Earnings (Loss)

We recorded net earnings of $588 thousand, or ($0.38) loss per diluted common share, for the year ended December 31, 2012, compared to net loss of ($14.3) million, or ($8.81) per diluted common share, for the year ended December 31, 2011. The increase from a net loss to net earnings was primarily due to lower provisions for loan losses, a $2.5 million gain on the sale of our headquarters building, lower provisions for losses on REO and loans held for sale and lower income tax provision expense for the year 2012.


Table of Contents

Net Interest Income

For the year ended December 31, 2012, net interest income before provision for loan losses totaled $13.5 million, down $3.6 million, or 21%, from $17.1 million of net interest income before provision for loan losses for the year ended December 31, 2011. The $3.6 million decrease in net interest income primarily resulted from a $58.4 million decrease in average interest-earning assets and a 36 basis point decrease in net interest margin.

Interest income decreased $5.2 million, or 21%, to $19.9 million for the year 2012 from $25.1 million for the year 2011. The decrease in interest income was primarily due to a $72.4 million decrease in the average balance of loans receivable from $397.4 million for the year 2011 to $325.0 million for the year 2012, which resulted in a $4.1 million reduction in interest income. Additionally, the average yield on loans decreased from 6.13% for the year 2011 to 5.93% for the year 2012, which resulted in a $950 thousand reduction in interest income. The decrease in the average yield on loans was primarily a result of continued high levels of non-performing loans, payoffs of loans with rates higher than the average yield on the loan portfolio, and lower rates on loan originations as a result of the low interest rate environment.

Interest expense decreased $1.6 million, or 20%, to $6.4 million for the year 2012 from $8.1 million for the year 2011. The decrease in interest expense was primarily attributable to a $44.9 million decrease in the average balance of deposits from $320.1 million for the year 2011 to $275.2 million for the year 2012, which resulted in a $642 thousand reduction in interest expense. Additionally, the average cost of deposits decreased from 1.40% for the year 2011 to 1.18% for the year 2012, which resulted in a $605 thousand reduction in interest expense. The decrease in the average cost of deposits reflects the impact of certificates of deposit at higher rates maturing and being replaced at lower interest rates. Also contributing to the decrease in interest expense during 2012 was lower average balance and average cost of FHLB advances. The average balance of FHLB advances decreased $4.3 million, from $87.0 million for the year 2011 to $82.7 million for the year 2012, which resulted in a $129 thousand decrease in interest expense. The average cost of FHLB advances decreased 15 bps, from 3.10% for the year 2011 to 2.95% for the year 2012, which resulted in a $133 thousand decrease in interest expense. The decrease in the average cost of FHLB advances was primarily due to the restructuring of $20.0 million of FHLB advances.

Provision for Loan Losses

We record a provision for loan losses as a charge to earnings when necessary in order to maintain the allowance for loan losses at a level sufficient, in management's judgment, to absorb losses inherent in the loan portfolio. At least quarterly, we conduct an assessment of the overall quality of the loan portfolio and general economic trends in the local market. The determination of the appropriate level for the allowance is based on that review, considering such factors as historical loss experience for each type of loan, the size and composition of our loan portfolio, the levels and composition of our loan delinquencies, non-performing loans and net loan charge-offs, the value of underlying collateral on problem loans, regulatory policies, general economic conditions, and other factors related to the collectability of loans in the portfolio.

For the year 2012, the provision for loan losses totaled $1.2 million, down $11.0 million, from a year ago. The decrease in the provision for loan losses for the year 2012 was primarily due to a $76.7 million decrease in our gross loan portfolio and an $8.3 million decrease in charge-offs.

At December 31, 2012 our allowance for loan losses was $11.9 million, or 4.51% of our loans receivable held for investment, compared to $17.3 million, or 5.09% of our gross loans, at year-end 2011. The decrease in the allowance for loan losses reflects the decrease in the size of our loan portfolio, the general stabilizing trend in overall asset quality we have experienced throughout 2012 as total delinquencies and charge-offs have continued a downward trend and the changes in the loss factors applied to the loan portfolio segments as a result of the application of a migration to loss analysis in determining our historical loss rates and the reassessment of qualitative risk factors for loans with no history of payment problems. Changes in the loss factors applied to the loan portfolio segments resulted in a $2.4 million decrease in the allowance for loan losses during 2012. Non-impaired loans decreased $64.7 million from $283.5 million at December 31, 2011 to $218.8 million at December 31, 2012, resulting in a decrease in the allowance for loan losses of $3.4 million during 2012.


Table of Contents

The ratio of the allowance for loan losses to non-performing loans, excluding loans held for sale, increased to 44.09% at December 31, 2012, compared to 44.20% at year-end 2011. We update our estimates of collateral values on non-performing loans every nine months. If the estimated fair value of the loan collateral less estimated selling costs is less than the recorded investment in the loan, a charge-off of the difference is recorded to reduce the loan to its estimated fair value less estimated selling costs. Therefore certain losses inherent in our non-performing loans are being recognized through charge-off periodically. The impact of updating these estimates of collateral value and recognizing any required charge-offs is to increase charge-offs and reduce the allowance for loan losses required on these loans. As of December 31, 2012, 70% of our non-performing loans had already been written down to their estimated fair value less estimated selling costs. The remaining 30% of NPLs are reported at cost as the fair value of collateral less estimated selling costs exceeded the recorded investment in the loan.

Loan charge-offs during 2012 were $7.1 million, or 2.20% of average loans, compared to $15.4 million, or 3.88% of average loans, during 2011. Of the $7.1 million of charge-offs, $1.0 million were reserved for at year-end 2011. The remaining $6.1 million of charge-offs were reserved for during 2012 and were primarily related to loans that became impaired during 2012 and required write-downs based on recent valuations of the underlying collateral. Charge-offs in one-to-four family residential real estate loans totaled $5.1 million and represented 72% of charge-offs during 2012. Charge-offs in church loans totaled $1.4 million and represented 19% of charge-offs during 2012. Charge-offs in commercial real estate loans totaled $544 thousand and represented 8% of charge-offs during 2012. Charge-offs in five or more unit residential real estate loans totaled $104 thousand and represented 1% of charge-offs during 2012. Of the $5.1 million of charge-offs in one-to-four family residential real estate loans, $3.4 million was attributable to the fair value write down of 30 classified loans that were transferred to loans held for sale in 2012, and subsequently sold in February 2013.

Impaired loans at December 31, 2012 were $44.4 million, compared to $56.3 million at December 31, 2011. Specific reserves for impaired loans were $2.7 million, or 6.16% of the aggregate impaired loan amount at December 31, 2012, compared to $3.9 million, or 7.00%, at December 31, 2011. Excluding specific reserves for impaired loans, our coverage ratio (general allowance as a percentage of total non-impaired loans) was 4.18% at December 31, 2012, compared to 4.71% at December 31, 2011.

We performed an impairment analysis for all non-performing and restructured loans, and established specific reserves for impaired loans of $2.7 million at December 31, 2012. Of the $2.7 million specific reserves at December 31, 2012, $368 thousand was related to $1.2 million of loans that are non-performing. Additionally, we recorded $2.4 million of specific reserves for impairment related to $17.5 million of accruing loans that were modified in troubled debt restructurings. On $13.6 million of impaired loans, the fair value of collateral less estimated selling costs exceeded the recorded investment in the loan and did not require a specific reserve or charge-off. The remaining $12.1 million of impaired loans were written down to fair value after charge-offs of $10.0 million were recorded during 2012 and in prior periods.

Management believes that the allowance for loan losses is adequate to cover probable incurred losses in the loan portfolio as of December 31, 2012, but there can be no assurance that actual losses will not exceed the estimated amounts. In addition, the OCC and the FDIC periodically review the allowance for loan losses as an integral part of their examination process. These agencies may require an increase in the allowance for loan losses based on their judgments of the information available to them at the time of their examinations. The provisions for loan losses and corresponding allowance for loan losses in these financial statements contained in Part 1, Item 8 of this Form 10-K reflect judgments by the OCC made during its supervisory examination of our Bank completed in July 2012.

Non-Interest Income

Non-interest income for the year 2012 increased $2.4 million from $713 thousand in 2011 to $3.1 million in 2012. The increase primarily reflects a $2.5 million gain on the sale of our headquarters building and a $257 thousand increase in net gains on sales of REO. Partially offsetting these increases were lower service charges, lower loan servicing fee income and higher losses on sales of loans for the year 2012. Service charges decreased by $99 thousand in 2012 primarily due to the decrease in deposits. Loan servicing fees decreased in 2012 primarily due to $51 thousand lower servicing fee income and $137 thousand higher amortization expense on our mortgage servicing rights asset resulting from payoffs and payments on loans sold to or serviced for investors. During 2012, we sold certain delinquent and non-performing loans, primarily commercial real estate and church loans, totaling $2.9 million and recorded a loss of $253 thousand.


Table of Contents

Non-Interest Expense

Non-interest expense for the year 2012 decreased $4.0 million from $18.0 million in 2011 to $14.0 million in 2012. A large portion of the decrease was from lower provisions for losses on REO and loans held for sale, which decreased a total of $3.1 million from $4.2 million in 2011 to $1.1 million in 2012. The provisions for losses decreased as recent valuations of the underlying collateral securing our non-performing loans held for sale and REO properties reflected steady values or a slower rate of depreciation than in 2011. Other significant decreases in non-interest expense include a $302 thousand decrease in compensation and benefits expense, a $270 thousand decrease in FDIC insurance premium expense resulting from lower deposits, a $157 thousand decrease in professional services expense and a $148 thousand decrease in occupancy expense.

Income Taxes

Income tax expense totaled $829 thousand for 2012 and $1.8 million for 2011. In 2012, the Company reported income tax expense equal to an effective tax rate of 58.50%, due to an increase in the valuation allowance related to the projected utilization of the Company's federal and state deferred tax assets. In 2011, the Company recorded a tax expense despite having a pre-tax loss. The tax expense in 2011 reflected the impact of tax provision true-ups and an increase in the valuation allowance related to the projected utilization of its federal and state deferred tax assets. The increases in the valuation allowance against our federal and state deferred tax assets during 2012 and 2011 were due to the Company's inability to project sufficient future taxable income. See Note 1 "Summary of Significant Accounting Policies" and Note 13 "Income Taxes" of the Notes to Consolidated Financial Statements for a further discussion of income taxes and a reconciliation of income tax at the federal statutory tax rate to actual tax expense (benefit).

Comparison of Financial Condition at December 31, 2012 and 2011

Total Assets

Total assets were $373.7 million at December 31, 2012, which represented a decrease of $40.0 million, or 10%, from December 31, 2011. During 2012, net loans held for investment decreased by $71.0 million, securities decreased by $5.6 million, office properties and equipment decreased by $2.0 million and deferred tax assets decreased by $850 thousand, while cash and cash equivalents increased by $32.8 million, loans held for sale increased by $6.1 million and REO increased by $1.5 million.

The C&Ds issued to us by the OTS effective September 9, 2010, which are now . . .

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